Return of the no-down payment loan

You may recall that part of the Economic Recovery and Reinvestment Act passed back in February includes a nice fat tax incentive for first-time homebuyers. The new law provides a maximum $8,000 refundable tax credit for first-time homebuyers with modified adjusted gross income of $75,000 ($150,000 for married couples filing a joint return). The hope was that the credit would push potential first time buyers already enticed by lower home prices and record-low mortgage rates to take the real estate plunge.

Well, apparently that’s not working as well as expected, or as fast as expected.

So HUD has upped the ante. Last week HUD announced that the $8,000 credit can now be used for a down payment and closing costs on an FHA-insured loan. The tweak to the program is that instead of waiting for the $8,000 credit when you file your 2009 tax return in 2010 (which doesn’t do you any good coming up with the down payment today) you can now change your tax withholding ASAP to get the $8,000 in your pocket, and FHA lenders have the green light to let you apply that money to the down payment and closing costs.

“The biggest obstacle for first-time buyers is coming up with a down payment,” said NAHB Chairman Joe Robson, a home builder from Tulsa, Okla,” in the official NAHB back slap lauding the change in policy. “We commend [HUD] Secretary Donovan for acting decisively to enable buyers to access the tax credit at the time of closing. This will help to stimulate home sales, stabilize housing and get the economy back on track.”

Hmm. I could have sworn that one of the takeaways from the great real estate wash out was that maybe, just maybe, no down payment loans aren’t such a great idea. That in fact, requiring potential buyers to have a little skin in the game is one of a few important factors in assessing the financial viability of the purchase. It gives the home buyer a vested interest in protecting an investment, that is, paying the mortgage. But with this new twist, homebuyers are essentially able to use $8,000 of taxpayer skin to finance a purchase.

Now to be sure, FHA loans have never carried big down payments; it can be as little as 3.5%, plus the cost of the FHA insurance. But bringing 3.5% to the table is still more motivation to be fiscally responsible than bringing nothing. Yet now thanks to more taxpayer largesse, a first time buyer can take out a $200,000 FHA-backed mortgage, use the tax credit to cover the 3.5% down payment ($7,000) and have another $1,000 for closing costs.

-- Carla Fried